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2004I I I I I I CITY OF BANGOR, MAINE Letter of Reportable Conditions June 30, 2004 CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS lc,ersteem --� ONeltette,-�� f�uvi�ov� %arstaan Ouellette November 24, 2004 To the Bangor City Council City of Bangor, Maine Dear Sirs: Certified Public Accountants and Business Consultants In planning and performing our audit of the financial statements of the City of Bangor (the City) for the year ended June 30, 2004, we considered the City's internal control in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements and not to provide assurance on the internal control structure. However, during our audit we became aware of eleven matters that are opportunities for strengthening internal controls and operating efficiency. The attached schedule summarizes our comments and suggestions concerning those matters. This letter does not affect our report dated November 24, 2004, on the basic financial statements of the City. The accompanying comments and recommendations are intended solely for the information and use of management and others within the organization and should not be used by anyone other than these specified parties. We wish to express our appreciation for the cooperation and assistance we received from the officials and employees of the City of Bangor, including the Bangor School Department, during the course of our audit. We will review the status of these comments during our next audit engagement. We have already discussed them with various City and School Department personnel, and we will be pleased to discuss them in further detail at your convenience, to perform any additional study of these matters, or to assist you in implementing the recommendations. Very truly yours, CITY OF BANGOR, MAINE Schedule of Comments June 30, 2004 REPORTABLE CONDITION (Non -material Weakness) Sewer System Controls Controls at the sewer utility are potentially weakened because of the utility's relationship with the Bangor Water District, which is a separate, non -City entity. The problem arises because the water and sewer utilities share many aspects of billing and collection. Specifically, sewer bills are based upon water usage data, as provided by the Water District; water and sewer bills are mailed together; sewer payments may be made at, among other places, the Water District; and the Water District's billing and payment software, which is incompatible with the City's general accounting software, is also employed by the sewer utility. As a result, a number of problems arise. First, where payments are made at the Water District, City funds remain outside the City's control for the period of time between their receipt from customers and the forwarding of payment to the City. This, combined with the increased handling of the City's assets introduces the potential for diversion of City property by non - City employees. Second, the flow of funds between the two utilities and their timing often results in the "float" of relatively large amounts due the City. Third, the incompatibility of systems between the sewer utility and the rest of City government makes timely tracking of sewer utility performance difficult. Further, it makes reconciliation increasingly important and time consuming. We recommend the City review its relationship with the water utility to correct these cash handling and accounting deficiencies. OTHER COMMENTS Enterprise Fund Deficits For several years, the Bass Park fund has incurred losses. This past year, net assets decreased despite a $519,804 transfer from the City's general fund. At June 30, 2004, the Bass Park fund deficit was $1,388,785. We understand that the City continues to review this fund closely to identify any possible changes that could potentially reduce costs or increase revenues. Our recommendation is that the City persist in these efforts. Monitor Ambulance Accounts Receivable and Review the Collection Policy In the past few years, the amount of ambulance accounts receivables in the 90 day and over category has increased. Management should continue to monitor the ambulance accounts receivables on a timely basis. In addition, we recommend that the City review its collection policy to determine whether additional steps could be taken to aid in collection of accounts. We believe that once a receivable is over 90 days old, it becomes increasingly difficult to collect. Uncollected accounts result in a direct decrease in net income. K CITY OF BANGOR, MAINE Schedule of Comments, Continued Segregation of Duties Treasurer's Office In the Treasurer's Office, mail receipts are opened and processed in certain circumstances by the same individual. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have mail receipts opened by an employee different from the person processing the receipts. This practice provides for verification of receipts processed and prevents receipts from being diverted for unauthorized purposes. We recommend that the City consider establishing a system requiring that a person different from the employee opening the mail process all mail receipts. Sewer Fund Because there are only four individuals at the sewer fund who perform accounting related functions, ideal segregation of duties is impractical. Because of this, we believe that the City should consider expanding the responsibilities of the internal audit functions to provide for a periodic review of sewer fund operations. School Department In the School Department, mail receipts are opened and processed by the same individual. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have mail receipts opened by an employee different from the person processing the receipt. In addition, the individual who opens the mail keeps no cash receipt log. The cash receipts log should detail the amount of each check, the date received, and a description of what the amount is for. Periodically, the cash receipts log should be reconciled with what has been recorded. Code Enforcement In Code Enforcement, the same individual that receives payments also reconciles cash received to permits issued. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have payments received by an employee other then the employee reconciling such receipts. This practice provides for verification of permits issued and prevents receipts from being diverted for unauthorized purposes. Assessor's Office In the Assessor's Office, any employee may accept payment and any employee may perform a reconciliation of such receipts. Furthermore, cash -outs occur once a week and all employees in the office have access to the cash box. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have payments received by an employee other then the employee performing reconciliations. We also reconnnend that access to the cash box be restricted to one individual who has sole responsibility for its safeguard and cash outs be performed daily. CITY OF BANGOR, MAINE Schedule of Comments, Continued Public Works At the Public Works Garage, the Inventory Manager performs inventory counts, updates computerized information, and also receives inventory. Ideal segregation of duties provides for separation of functions by different individuals and, therefore, would have each task performed by a different employee. Because of limitations of the small size of the staff, we suggest that cautious review of the financial information be performed regularly by responsible officials (such as the Public Works Director or Finance Director) in order to identify unusual activity. Acquire a Fixed Assets Tracking System Instead of an integrated accounting system that includes a fixed asset accounting module, the City's fixed assets are maintained on an excel spreadsheet. Depreciation for enterprise funds is calculated using formulas, which must be created when a new asset has been acquired. We recommend that the City consider acquiring a fixed asset system to account for and monitor its physical assets and related depreciation. Additionally, we recommend that formal controls be adopted to ensure that all disposals of fixed assets are reported to the accounting department so that the accounting records can be properly updated. Arbitrage Rebate Calculations I.R.S. regulations relating to arbitrage requires tax exempt issuers of debt instruments, under certain circumstances, to perform an arbitrage rebate calculation. As a general rule, the calculation must be performed for each government obligation issued after August 15, 1986. The calculation must be made five years from the date of issue and every five years thereafter, and the final calculation is made upon retirement of the respective issue. For revenue anticipation notes and other obligations which are retired prior to five years, the rebate calculation must be performed upon retirement and not on the five year anniversary. We recommend that the City identify any such issues and perform the necessary calculations, if applicable. Continuing to accumulate the information on a timely and consistent basis and performing the calculations when due will save time and money as well as ensure a more accurate calculation. Municipal Valuation Return Error The Municipal Valuation Return incorrectly overstated the buildings valuation by $40,990,400. The error was in reporting only; the Return correctly set the tax rate and levied the proper amount of property taxes, as approved by the City Council. The Assessor subsequently informed the Property Tax Division of the Maine Revenue Services, the recipient of the Return. We recommend that a second individual from the Assessor's Office review the Return to avoid such errors in future years. MDOT Reporting It was noted during the audit that the reports filed with the Maine Department of Transportation to comply with grant reporting requirements contained errors. The reports incorrectly stated eligible expenses due to a formula error within the report. This error was in reporting only, and the proper grant draw downs were requested. The reports also doubled up on expenditures associated with a smaller ADA grant. The Bus Superintendent subsequently informed the City's MDOT contact of the errors. In the future, we recommend these reports are properly reviewed and tied to supporting backup. 11 CITY OF BANGOR, MAINE Schedule of. Comments, Continued Title 20 Considerations Maine State Statue Title 20, subsection 15613, dictates that any unallocated balances in excess of 3% of the previous year's school budget must be used to reduce the state and local share of the foundation allocation for the purpose of computing state subsidy. As of June 30, 2004, the School Department's fund balance equaled 4.2% of the previous year's budget. Per the Statue, the School Board is able to carry forward the fund balance in excess of 3% of the previous year's school budget and disburse these funds in the next year or over a period not to exceed 3 years. We recommend the School Board work to ensure that the School fund balance is brought under the 3% threshold so as not to inadvertently reduce state subsidy. Deposit Cash Receipts on a Timely Basis During the audit it was noted that cash receipts are not being deposited on a daily basis. At the present time, cash receipts are being accumulated and deposited sporadically, sometimes up to a week later. As a result, not only is there a risk of loss from misplacement or misappropriation, but the cash is not available for expenditures or investment. We recommend that deposits be made on a daily basis both to improve cash flow and to reduce the risk of loss. Motor Pool Inventory Valuation During our analysis of inventory, we noted that the entire Motor Pool inventory is priced at replacement cost, based on the most -recent purchase price. The practice of restating inventory at replacement cost has the effect of overstating the actual value of inventory as well as overstating the cost incurred. We recommend that the Motor Pool change its accounting system so that the weighted -average cost of inventory is computed. This will enable the Motor Pool to determine the effect of price fluctuations on the year-end inventory balance and avoid overstating costs.